We received this message via our contact form: “Can I retire with a corpus of Rs. 3 Crores?” How could I reply yes or no when there is no other information? Rs. 3 crores could be anywhere between ample, to a grey area, to inadequate.
It all depends on the lifestyle of the retiree and the kind of capital market experience they have. We can provide certain rough guidelines via the initial withdrawal rate also known as the safe withdrawal rate.
The safe withdrawal rate (SWR) is the annual withdrawal amount in the first year of retirement divided by the available retirement corpus. It is better to refer to this as the initial withdrawal rate (IWR) because many assume the SWR is applicable throughout retirement. It is valid only at the start of retirement, and IWR conveys this better.
The following must be considered as an opinion based on creating retirement planning calculators and backtesting retirement strategies for over a decade by repeated use of the freefincal robo advisor tool.
IWR < 3.5% The retiree can afford to take on capital market risks. The corpus is likely adequate. Keeping pace with inflation is a reasonable possibility. The lower the IWR, the better the chances of a comfortable retirement. For examples of IWR associated with (a) pure bucket strategy, (b) income flooring + bucket strategy and (c) annuity laddering with bucket strategy, see: I plan to retire in 25 years; what should be my safe withdrawal rate?
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Note: It must be understood these suggestions do not talk about the quantum of risk one can take. That would need a precise post-retirement calculator.
IWR > 4.5% The retiree cannot afford to take on capital market risks. The corpus is likely inadequate. Most of the corpus must be used for a pension, with some cash stashed for emergencies. Trying to keep pace with inflation is off the table. The retiree would be susceptible to unexpected expenses and have to be quite frugal. For example, My withdrawal rate is 5%; what are my post-retirement investment options?
3.5% < IWR < 4.5%. This grey area requires careful examination. The corpus is neither robust nor grossly insufficient. The pension should be the dominant asset in the retirement basket, but perhaps a pinch of risk can be taken. Keeping pace with inflation will not always be possible, and some luck and cautious spending (when possible) would be necessary.
Now, estimate your IWR with your annual expenses and retirement corpus, and decide the way forward. If your IWR is greater than 3.5% and if you are still in good health, then we strongly encourage you to continue working either full-time or part-time, in the same job or a different one.